Beware of investing in properties for which you are promised ‘assured returns’. Lack of statutory provisions allow builders to get away scot-free if they default on payments

He had cut expenses, budgeted and saved every penny he could to build up a substantial amount in his bank. At the age of 74, Naresh Bansal wanted to invest the money in a scheme which would bring him good returns. An IT Park project in Greater Noida in 2008 seemed attractive enough as its developer was promising ‘assured returns’ on its office space till possession. The developer also promised to get a lease agreement done for Bansal for renting out the property after it was completed.

Everything worked out fine initially. When the construction was going on, Bansal was paid returns at the rate of 12% on the cost of the unit for two and a half years. His happiness, however, turned to dismay when, without any warning, the money stopped coming in. “When I asked the developer for a reason, he said the project was complete and he had taken part-completion certificate from the Greater Noida Development Authority. I was told all the investors had been asked to take the possession of their respective units,” says Bansal.

The truth was, the project was still under construction and even today, after almost five years, its condition makes it unfit to be leased out for any commercial use. “I have been cheated. I have no source of any income at all. I don’t even have the money to hire a lawyer for a legal battle,” laments Bansal.

Bansal is not alone. He and others like him – about 650 investors in the project have now formed an association to fight against the builder. Their first stop was at the Economic Offences Wing (EoW) of the Delhi Police. “When the EoW did not entertain us, we filed a petition in the Tis Hazari Court demanding severe action against the defaulting company,” says Yash Chadha, another investor.

‘Assured returns’ in real estate are almost like ponzi schemes tempting thousands of investors to put in their money in projects – mostly commercial. “When a project doesn’t sell, the developer attracts consumers to invest. Unfortunately, many retired professionals and senior citizens who want a regular inflow of money buy into these projects and find themselves trapped later,” says a real estate broker.

Desperate developers use desperate means to make money. “One of them had a scheme in which consumers were told to buy any part of the project – a ‘studio space’, the front office area and even a fountain in the common area! Investors were told they would be paid assured returns at 12% of the costs till the project was ready. It was really strange,” says the broker.

It’s not that people are not campaigning for justice. Manish Jain, an investor who incurred losses in a project offering commercial office space, approached the Delhi High Court with the plea that that such schemes be covered under the definition of a ‘Deposit’ under the Reserve Bank of India Act 1934 and collective investment scheme (CIS) under Section 11B of the SEBI Act read with CIS regulations. If that’s done then builders would be forced to comply with RBI and Securities and Exchange Board of India (SEBI) regulations.

Strangely, according to SEBI and RBI, such schemes are not under their regulatory jurisdictions. Even EoW Delhi says it is just a violation of contract between two parties and doesn’t amount to a criminal offence.

“Now the investors need to tread very cautiously. Things have become very tough for those who have already invested. The only recourse is a civil suit and a decision on it might take years,” says Jain.

He says he is likely to contest SEBI’s stand in the Delhi High Court because he believes these developers are using different legal terms in builder-buyer agreements but running schemes that’s somewhat similar to CIS.

Some financial experts even question the term ‘assured return’ used by developers. “I would like to find out who is giving the ‘assurance’ of these returns. Unless the government ‘assures’ the returns, such ‘assurances’ have no value for me. It is unfortunate that there is no one regulating such schemes even as innocent, middle-class and elderly people lose their hard-earned money,” says Vishal Kapoor, an investment banker from Avigo Capital.